Are Supermarkets Now Masters of Tough Economy?

There's something unusual in the findings of SN's latest annual economic survey. Retailers are actually expressing confidence about their business outlook.

Yes, that's right, supermarket operators, a notably cautious breed in past surveys, are more confident in the face of a still-challenging economy. What's up here?

You can see an in-depth story about the survey here[3]. First, let's be clear that retailers are cognizant of continued challenges, such as heightened competition and food-cost inflation.

However, signs of optimism emerge. This could result from improved expectations about consumer purchases, but that's not the only reason for optimism.

It seems many retailers are actually more confident about their ability to negotiate tough times in general. They've learned a lot about survival over the past few years, the most challenging period in anyone's memory. It took time to get the balance right between managing sales and margins, but food retailers learned lessons that are now reflected in a new confidence.

Consider their opinions on food inflation. Retailers overwhelmingly expect food-cost inflation from suppliers this year, with the majority anticipating between 2.1% and 5%, according to responses. Yet retailers said they expect to pass along to consumers the vast majority of those increases. That's a remarkable finding that wouldn't have been the same just a year or two ago, when retailers were afraid consumers would automatically reject higher prices.

In fact, retailers have learned how to compensate for price hikes. The survey found 68% plan to accelerate price-focused advertising this year either a little or a lot more. You'd think stores had exhausted their ability to promote price more, but apparently not.

Along those lines, retailers expect to further ramp up private-label penetration, with about 75% anticipating it to gain between 0.1% and 5% in relation to total-store dollar sales. This is another surprise given years of PL penetration growth, but it speaks to retailer confidence in this strategy.

Here are more measures of confidence: More than 70% of retailers expect higher customer counts, and more than 40% expect profits to be up slightly.

Supermarket executives deserve to feel better about their ability to operate in tough times. So are they now masters of handling downturns?

Not to spoil the party, but retailers should avoid getting too cocky. A consumer survey outlined in this week's issue, from Supermarket Guru Phil Lempert, shows consumers are increasingly aware of rising food prices and, importantly, associate that more with supermarkets than restaurants (see Data Points, here[4]). Moreover, some 68% of consumers said they are willing to switch to less expensive retailers if needed. Here we go again!

So the truth is supermarkets aren't masters of this tough economy, even though they are more accomplished at handling it. They can't be masters, because the variables keep changing.